Ford comes in, DDD gets hit, and Hain needs to hang on!

Ford announced Q4 earnings this morning, showing strong Sales and Earnings Per Share (EPS), but provided  caution on their European markets. it is now at our $13 level and I think its a decent stock here above 13.00. As long as its above 13.00 I think its a good buy.

DDD's hot streak came to an end yesterday selling off more than 11% on the day. Today shares initially showed more weakness only to rally hard into the close and managed to retake the 20 day moving average. The past two days have shown some violence (lots of price volatility)  in their trading action. We should let this one cool off a bit before we want to get involved. There is a saying that stocks form their tops in violence  and bottoms in silence.

This is not the kind of pullback we typically like to see. Usually what we like to see is a low volume, slight decline. A huge move on massive volume, followed by another surge in the opposite direction on similar volume, says that there is a large range of prices that buys and sellers are disagreeing on. I would rather not pick a side here, but rather join the side that comes out with control when the waters calm.


HAIN made a strong move last Friday breaking above key resistance and both the 50 and 200 day moving averages. Yesterday however reversed that move right away bringing us back under the resistance level. Today saw some early selling get bought and managed to hold above the 20 day average.

This reversal has the look of a bull trap. Having price break through resistance and the key moving averages only to reverse substantially, trapping all the buyers who bought on the breakout. If the support under the prior low fails ($54.20), there will be no trade here for now.

Weekend Update

The markets closed higher again this week. The SP500 reached a new 5 yr high and closed at 1502. If we look back at the past 35 years for the SP500, we see we are now approaching the all-time highs. This should prove to be a stiff resistance zone. Although I think we will move to all-time new highs at some point this year, now is a time to be more cautious until we see a breakout or consolidation from this zone. That doesn't mean sit in cash, but it does mean we are at a higher risk for a downside move.

Part of the reason I believe we will reach new highs has to do with the sentiment behind this market (how people feel about it). This market is generally hated. The retail investors (all us little guys) have largely not been participating in this significant up move. Most feel the market is very risky and a suckers gamble. All the while stocks continue on to test new highs.

Remember back to the prior highs, 2000 and 2007; the dot.com bubble and the housing collapse respectively. In 2000 investors believed that stocks could never go down  and anything that ended in a .com was an automatic gold mine. In 2007 it was widely known that houses in America NEVER do down. Both symptoms of irrational euphoria. As you can see, irrational euphoria will end and panic ensues. The nice thing about where we are now is that most people feel that Europe is a risk, China's growth is slowing, the US has financial crisis issues, etc. Lots of fears! Fear is great for the market, it is what drives prices higher. Fearful investors are under-invested investors, with lots of money to buy more stock with, should the dangers clear.

Enough rambling, lets take a quick look at our top 10 picks after week 4 of 2013:

HAIN

Price has broken out from its downtrend resistance and has gotten above its prior support/resistance level at 57.00. I am very constructive on this stock right here, with a stop below 54.00. They report earnings on Feb 5 and this could very well regain its upward trajectory. Also the volume has seriously picked up in the past 2 weeks. Investors are accumulating the stock.

AAPL

Q4 Earnings disappointed the street this week and this stock remains in free fall. Stay far away for now. Always remember: its never too late to sell. If you set a stop, stick to it!


MOS

MOS on Friday broke and closed above the Inverse Head/Shoulder pattern on heavy trading volume. We want this to settle out here a bit and consolidate this recent gains between 60-63. Pullbacks into this price zone can and should be bought as long as price stays above $60.

HD

Home Depot continues to make new all-time highs. You can buy this on any pullback. Just really strong action this week.

CMI

Cummins continues to see really strong action. With earnings in a week and nearing resistance levels I couldn't fault you for taking some profits here. But If the $118 resistance can be taken out, we could see new highs and a move to the upper end of the channel.

F 

Ford pulling back here and testing the 20 Day Average. They announce earnings for Q4 this week. Any pullback to the 13.00 level is constructive consolidation and should be bought. Place your stop just below the 12.90 level.

WFC

Wells Fargo just chopping along right above the key long term resistance area. As long as we are above the $34 area, Wells is in fine shape. Just taking a rest here, lets see if if can continue higher. So far, so good

PBW

Our clean energy play has broken out of its flag pattern and we are expecting it to continue to trade higher. This is a strong buy above 4.25.

DDD

3d Systems continues to rip to new highs. I'm hoping we are seeing a short term top or consolidation here. I would love to get into this one on a solid pullback.

ENB

Enbridge pulling back here a bit. I would like to see this retest the 42.00 level. If that holds, expect a run to the upper trend line.

Whats the Plan?

Every trader/investor needs a plan. A plan is a must for success in the markets and managing your savings. An investing plan can be very simple or incredibly complex. I tend to prefer a more simple method to my investing, but everyone will ultimately have to find their own way.

Having a plan is necessary because of the emotional effects markets can have on our decision making. You need to make most of your decisions in a disciplined, unemotional state. Emotions will have you selling too soon or holding on too long. They will have you make buy and sell choices that you will look back on in disbelief. "How could I do something that dumb!" you will say, "what was I thinking selling there!". These thoughts will occur too often if you don't plan ahead. 

Therefore, we need a plan!

First and most importantly, we need to control risk. i.e. how much are we willing to lose by buying this stock? A general rule for managing risk is by using the 2% rule. Lets say, for the sake of discussion that we have a $10,000 account for investing/trading. The 2% rule states that the most you can lose on any one investment is no more than 2% of your total account balance. In this case 2% of 10,000 is 200. This means that the most you are willing to risk losing on one trade is $200. What this allows is for you to sustain a string of losses and not do major damage (blow up) to your account.

Which brings us to Stops. Stops must be your friend. Learn to trust your Stops and they will save your account. A Stop-loss is simply a price for the stock where your thesis for the trade is proven wrong. This could be a price just below a major support area, an indicator like Volatility Stop, or a moving average support area.

Using the 2% rule and support Stop-loss, how do we enter a position in ATT? Based on only risking 2% of our total 10,000 account (200), we buy T at today's closing price of 33.75 and our stop for ATT is just below 32.75. The difference from the price we bought at (33.75) and the stop price (32.75) is $1.00. Meaning we stand to lose $1.00 per share by triggering our stop and having to sell. If we can lose $200 on a trade and stay within our risk parameters, we can buy up to 200 shares of T on this trade.

Ideally you would like to buy the stock very near to the support area so you can risk even less than 2%. The less you risk the better. If you are buying right on the support area you will know very quickly if you are right or wrong.

Risk management is the single most important aspect of your trading plan. It will keep you in the game by cutting your losses short and not letting them turn into large losses.

A breakdown from a support area can create a huge loss. Here is a recent example of that in AAPL:

If you chose to not obey your support stop here because you like Iphones or think Apple's stock should never go down, well you sure got a groin kick of reality.

No matter how good you think a company is or how groundbreaking a product is, a stock can always go lower and lower. This is why you must NOT go with your "feelings" and must stick to your Stops.

Having a simple understanding of risk management puts you ahead of most investors and will keep you relatively safe from the dangers of the markets. The only thing we can control when investing in the markets is how much we are willing to risk. We can't control if it goes up or down, but we can control the parameters for where we are still correct in our ideas or where we have been proven wrong. The very first thing you must consider when you want to buy a stock is where your stop-loss will be. Where is the support? Where would support be broken? Those are the questions that need to be in your head when you are considering entering into a new position.

Next time we will discuss simple trading strategies and how to implement them into our risk management plan.

Market Check 1/23/13

Yesterday was a good day for the markets. Google and IBM beat analysts expectations for 4th Quarter earnings, the SP500 closed at a new 5 year high, and our prospect PBW broke out from its flag pattern.


PBW breaks out!

This is a text book breakout. The price range expanded on the breakout day, volume spiked showing lots of interest from traders, and today we are seeing positive action following through the breakout. As long as this can hold above the lower support of the flag formation ~4.30, we will likely see higher prices.


SP500 closes at a new 5yr high

This of course is very positive activity. What we have seen since the low in 2011 is steadily higher highs and higher lows. Perfect uptrend action! Yes its possible that we could see a bit of a pullback from here, but as long as we stay above the previous low at ~1,350, this uptrend will remain intact; any significant pullback would be a solid buying opportunity. Pullback targets to watch would be 1,460 and 1,400. A break below 1,400 would create a significant warning sign.

On deck for today is the Q4 earnings report for Apple. Apple has lead the tech sector for years and after the recent correction expectations are low. Low expectations create opportunities for positive surprises, but we will have to wait and see. They announce after the close today.

Since our watch price triggered on AAPL, the stock has held up well. I have a feeling after today's earnings report we will see a breakout into a buy or our price level will fail. This is most likely the biggest report AAPL has ever had! should be exciting.

Don't Fight The Fed!

Something every investor/trader needs to be watching and following are the current inflows of liquidity(money) coming into the stock market via the Federal Reserve; tracking the Fed's POMO Buy and Sell days is extremely helpful for traders. In early 2012, the Federal Reserve launched a stimulus program called Operation Twist. Operation Twist basically was the purchase and sale of long and short term bonds designed to keep interest rates near zero for borrowers. The reason we were interested in Operation Twist is because there was a direct correlation with the reaction in the markets with the actions of the Fed. They would have certain days during the month that they would be buying treasury bonds and the stock markets would get this boost to the upside. On days where they would sell treasury bonds, the stock markets would be weaker and have more selling pressure.

Operation Twist ended on Dec 31st 2012, but the Fed has moved forward with a similar program. The new program is essentially Operation Twist without the Twist, meaning they are only buying bonds now and not selling any to balance. What this creates is a flush of liquidity into the markets with zero selling pressure to counteract its effect. You see, with Operation Twist roughly 3/4 of the days would be "Buy" operations and 1/4 would be "Sell" operations. This would create a positive effect on the markets, but it would end up muted because of the Sell days. However if you looked at the POMO schedule released by the Fed (here), you would know when the Buy days and Sell days were planned. This allowed us to position around the Buy days and consider taking profits before large Sell days. 

With the latest program in place it is simply a matter of looking to see how much is coming into the market in any given day; they have small purchase days and large purchase days. What this creates in the market is an environment where it is difficult to see any sustained selling pressure on stocks. The liquidity programs are designed to "buy the dips" and will look to put the money to work on most any pullbacks. Needless to say, this is extremely bullish for stocks and until this is ended or slowed, it will be a very good wave for us to ride. To put this new wave of liquidity in perspective, during Operation Twist the Fed was Buying roughly $20 Billion more treasuries than they were selling, creating a net $20 Billion injection into the markets per month. The new plan has the Fed purchasing just about $85 Billion per month with zero selling. That's 4 times as much liquidity and we are seeing the direct impact on the markets. Until this stimulus stops, we need to be aligned with it. Don't fight the Fed! its a cliche now, but it is absolutely the case.

It is so simple to follow the buy operations. All you need to do is click the link above and you will be taken to the New York Fed webpage into their "permanent open market operations" schedule.

It will be to your detriment if you aren't taking advantage of this opportunity that is being presented here. For example Thursday and Friday this week are "Large" buy days and would be a great opportunity to snag some of that free cash out there. Thank you Ben Bernanke!

10. Proshares Clean Energy Fund (PBW)

10. Proshares Clean Energy Fund (PBW)


#10 on our list is Proshares Clean Energy Fund which holds roughly 50 different clean energy related stocks. I have written previously about this Fund in detail that you can find in the post archives; if you want more information about this, feel free to check out that earlier post. Today I am going to talk specifically about the technical picture and what has developed since our first post.

Since breaking above long-term downtrend resistance back in early December 2012, price has rallied up to test the most recent high at $4.50. We want confirmation that this trend is reversing and taking out that prior high will be a key step in that process. When a stock is in a down trend (lower highs/ lower lows) we want to see the stock move above the prior high to break the pattern of lower highs. That is the first step.

Next we want to see some bullish price action develop as we approach those previous highs indicating that we still have enough strength to break through the resistance level.

What I have been noticing over the past 2 weeks is that since moving from a low of $3.46 to a high of $4.48, price has consolidated into a very positive pattern known as a Bull Flag or Bull Pennant. Typically with a flag type pattern price will rally strongly then move in a narrow trading range for a period of time. Then the trading range will narrow considerably before breaking out hard in the same direction as the current pattern trend. A Bull Flag is known as a continuation pattern as it indicates price is just taking a breather after a sharp up move before continuing higher. This is positive action.

Price consolidation is a huge part of technical analysis. There are a few general rules:
1. After a strong up or down move, the short term trading range will narrow as traders take profits and others who missed the rally look for a pullback to enter the stock.
2. From tight consolidation comes expansion. Price tends to tighten and expand in a trend, and this is something we always watch for around these tightening areas.
3. Typically you like to see the trading volume decrease as price consolidates. This indicates that the sellers are not aggressively dumping shares and that a more orderly profit taking is under way.
4. We need to see the trading volume expand once the consolidation breaks out. Its important for the pattern probability to see lots of buying interest once the pattern begins to break the tight range.

The next thing I notice here is that the price has held above its 200 day moving average (the dark blue line). This represents the average price over the past 200 trading days and is a strong area of resistance/support. The fact that it has held above during this consolidation is very positive for the stock.

Lastly and one of my key indicators I use for short term trades is that we are seeing the 20 day average (green line) uptrending and above the 50 day average (red line) which is also uptrending. What this tells me is that both the short term (20 average) and the intermediate term (50 average) are both trending in a positive direction. I have found that your probability for success in a trade is greatly increased when these two averages are showing this positive trending action.

As for my recommendation of what to do here is I am looking just a couple more days at the most of consolidation before this continues its rally higher. I will be looking to add to my current holdings once this touches the 20 day moving average. That I believe will be the end of the tightening and hopefully will lead to a price expansion in a positive direction. Bottom line is everything is shaping up here for higher prices and this fund seems to be a good value with all the correct momentum in place to move higher.

 If this in fact moves against our plans (which can often happen) I will be looking to exit this trade if it breaks below the rising 50 day moving average (red line). Remember a small loss is much better than a big one! Never let a trade get away from you and always have a point (a Stop-loss) where the market will prove your thesis wrong. For me, my plan would be proven wrong with a breakdown of the rising 50 day average. That would mean that the 200 day average would fail, the 20 average would fail, the prior consolidation area (near $4.10) would fail to hold as support and finally the 50 average would fail...I would say those all together would make me think I was wrong.

Good trading!

9. Enbridge (ENB)

9. Enbridge (ENB)

Sector: Energy- Oil/Gas Pipelines


#9 on our list of 10 is Enbridge.  Enbridge is the largest North American Oil and Gas Pipeline manufacturer and maintenance company. I know, i know, oil pipelines are not the cleanest of businesses and there has been a lot of debate about the construction of the Keystone Pipeline. But, as an investment, Enbridge is a safe and stable high growth position to add to a portfolio. They pay a 3% annual dividend and their stock continues to make all-time news highs almost weekly.

The reason I like Enbridge vs a Conoco Phillips, Chevron, or Exxon, is the fact that the pipeline companies are not directly effected by the fluctuations in the price of the actual commodities (oil and gas). The way that oil prices swing from high to low has a direct impact on the stock performance of the oil producers and since oil inventories in the US are at seemingly high levels, the oil companies are having a hard time moving higher on their own growth prospects; If oil prices get hit, so do these oil producers. But not Enbridge, the fact that the US seems to have discovered more oil/gas and has larger reserves only helps a company like Enbridge. More oil and gas equals more need to build and transport through pipelines.

Understand though that pipelines don't come without their share of risks also. For example, if a pipeline leaks or breaks, the pipeline manufacturers will be responsible for the damages. Having a pipeline malfunction can hit the stock pretty hard. But, if you like steady stock appreciation, a solid dividend, and a very stable business model, Enbridge could be for you.

With a stock that climbs like Enbridge's does, you must be patient when choosing an entry point. I have been watching this stock for about 3 years and I have only made purchases twice as shown by the green arrows. Its true that any point along this trend would have been a successful purchase, but as prudent investors/traders we want to be looking for the most low risk/ high reward opportunities to be putting our money to work. When dealing with a trend like this you want to make your purchases just as price touches and bounces off of the lower trend support. I know looking back this looks like a perfect trend, but just remember that a trend can always change. We don't want to just throw our hard earned savings at a trend hoping that it continues; we want to assume the trend continues higher but we also don't want to be buying near the upper boundaries of the trend channel. As you can see, buying this stock after a sharp gain (like we have seen recently) is not the lowest risk or most profitable time to do so.

All in all, this is a very strong stock representing a stable and growing company. This isn't what I would call a "fast money" trade, but as a way to grow your savings consistently, you would be hard pressed to find one better.